Impact of Trade Liberalisation on the Informal Sector—A Study for the BRICS

Abstract

This paper empirically investigates the impact of trade liberalisation on the informal economy for the BRICS nations. Common criteria for choosing these countries are (a) trade reforms and (b) presence of a large informal sector. While trade liberalisation and globalisation may have propelled economic growth for these countries, their impact on the unorganised sector in these countries is not so straightforward. An increase in the size of informal sector may lead to higher inequality, lower efficiency and other development-related issues. Using panel data for the five countries: Brazil, Russia, India, China and South Africa for the period 1996–2015, this paper attempts to investigate whether trade reforms undertaken by the BRICS nations have led to higher informal sector activity or have caused the shadow economy to expand in these countries. Due to the complexity involved in defining and measuring informality, two measures of informality, given by Kauffmann and Kaliberda and Schneider, were used to identify the impact of trade liberalisation on the informal sector activity in these countries. Empirical investigations based on the Kauffmann and Kaliberda approach revealed higher informality with greater trade volumes, whereas the impact of trade liberalisation was found to be insignificant on the measure of informality provided by Schneider’s approach.

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Notes

  1. 1.

    Informal employment is another measure of informality that has been used in the literature; however, due to data constraint on informal employment, the same could not be used for the estimations for BRICS nations.

  2. 2.

    Mercosur is a South American Trade Bloc established by the Treaty of Asuncion in 1991 and Protocol of Ouro Preto in 1994, with full member countries being Argentina, Brazil, Paraguay and Uruguay.

  3. 3.

    See Cardoso 2009.

  4. 4.

    See Gimpleson et al. (2014).

  5. 5.

    See Chow 2004.

  6. 6.

    Data on electricity consumption, required to compute Kauffmann and Kaliberda’s estimates of informality, taken from the World Development Indicators are available till 2014. Schneider’s estimates of the shadow economy are available till 2015.

  7. 7.

    An important factor affecting informality is degree of labour market flexibility. This variable could not be included in the estimations as it is time invariant and was likely to be absorbed in the fixed effects.

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Khanna, P. Impact of Trade Liberalisation on the Informal Sector—A Study for the BRICS. Ind. J. Labour Econ. (2021). https://doi.org/10.1007/s41027-020-00299-2

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Keywords

  • Trade
  • Informal sector
  • Panel data
  • BRICS